IBM 2010 Q1 Form 10-Q Summary
Business context and reporting period
International Business Machines Corporation (IBM) reported unaudited results for the three months ended March 31, 2010, compared with the first quarter of 2009. IBM’s businesses include Global Services, Software, Systems and Technology, and Global Financing. Management said results reflected improved revenue performance, business-mix shifts, productivity and continued investment in growth areas.
Financial results and liquidity
- Revenue: $22.857 billion, up 5.3% reported but down 0.1% adjusted for currency. Services revenue was $13.805 billion; Sales, $8.508 billion; Financing, $545 million.
- Profit and margins: Gross profit was $9.976 billion, with a 43.6% gross margin versus 43.4%. Pretax income was $3.515 billion and net income $2.601 billion, up 12.6% and 13.3%, respectively. Net margin was 11.4%, versus 10.6%; diluted EPS was $1.97, up 15.9% from $1.70. The effective tax rate was 26.0%, versus 26.5%.
- Cash flow: Operating cash flow was $4.437 billion, compared with $4.386 billion. Management-defined free cash flow, excluding Global Financing receivables, was $1.432 billion, up from $1.043 billion. Investing activities used $699 million and financing activities used $3.368 billion. Cash and cash equivalents ended the quarter at $12.472 billion.
- Balance sheet and liquidity: Cash plus marketable securities totaled $13.977 billion. Total debt was $26.319 billion, up from $26.099 billion at year-end 2009; total assets were $105.208 billion and total equity $22.149 billion. Working capital was $11.123 billion, down from $12.933 billion, and the current ratio was 1.32 versus 1.36. IBM reported access to a $10 billion global credit facility.
- Capital returns: IBM repurchased 32.2 million shares for $4.017 billion and paid $718 million in dividends. Weighted-average diluted shares fell 2.1% year over year. After quarter-end, the board raised the quarterly dividend from $0.55 to $0.65 per share and authorized an additional $8 billion for repurchases.
Material changes and segment performance
- Software: Revenue rose 10.6% reported (5.5% currency-adjusted) to $5.018 billion. Reported pretax income increased 53.7%, partly reflecting the divestiture gain; normalized pretax income rose 25.2% to $1.558 billion.
- Global Services: Combined external revenue increased 4.3% reported but declined 1.8% currency-adjusted. Global Services signings fell 2.1% reported (7.4% currency-adjusted); estimated backlog was $134 billion.
- Systems and Technology: Revenue increased 4.9% reported (1.8% currency-adjusted) to $3.385 billion. System x, storage and retail solutions grew, while System z and Power Systems revenue declined. The segment recorded a pretax loss of $170 million.
- Global Financing: External revenue fell 7.1% reported, while pretax income increased 18.7% to $427 million, helped by lower financing-receivable provisions.
- Balance-sheet movement: Total assets declined $3.814 billion from year-end, mainly due to lower receivables and deferred taxes. Total liabilities declined $3.208 billion. IBM’s consolidated debt-to-capitalization ratio increased to 54.3% from 53.4%; its core ratio, excluding Global Financing debt and equity, rose to 17.7% from 16.0%.
Outlook, unusual items and risks
- Guidance: IBM raised its 2010 diluted EPS expectation to at least $11.20, from at least $11.00 previously. For Q2, it expected revenue growth at constant currency; Software performance at constant currency was expected to be similar to Q1 after adjusting for the PLM divestiture, Global Services to deliver modest constant-currency growth, and Systems and Technology to post mid-single-digit constant-currency growth.
- Significant items: IBM recorded a $591 million pretax gain on the sale of its PLM activities to Dassault and $559 million in workforce-rebalancing charges. The prior-year quarter included a $298 million gain on the Geodis logistics divestiture and $265 million of workforce-rebalancing charges; IBM said the net combined impact of these items was approximately equivalent between periods. Five acquisitions were completed for an aggregate purchase price of $996 million.
- Other commentary: Management expected most benefits from Q1 workforce actions in the second half of 2010, with payback by year-end. It expected 2010 retirement-related plan costs of approximately $1.5 billion and an effective tax rate of approximately 26.0%–26.5% in the normal course of business.
- Risks and contingencies: IBM cited economic and IT-spending uncertainty, currency movements, customer credit and financing risks, pension funding, cybersecurity, acquisition execution, and legal, environmental and tax matters. Significant disclosed matters included U.S. and European antitrust investigations, Endicott environmental and personal-injury claims, and Brazilian non-income tax disputes with approximately $600 million of potential exposure; IBM said it believed it would prevail. Recorded liabilities and changes for the quarter were not material, but outcomes remain uncertain. The filing also notes that derivative agreements may trigger termination provisions if IBM’s credit rating falls below investment grade.
- Controls: Management concluded disclosure controls and procedures were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the reported earnings growth was driven by ongoing operations versus the $591 million PLM gain, currency effects and share repurchases.
- Whether Global Services signings and backlog convert into revenue, particularly given the decline in Q1 signings.
- Whether Systems and Technology returns to growth as planned with product launches later in 2010, and whether the segment’s losses improve.
- Whether operating cash generation remains strong after substantial buybacks, dividends, acquisition spending and pension contributions.
- Developments in the disclosed legal, environmental and tax matters, including the potential Brazilian tax exposure and any related changes in reserves.